Passing Clouds in the Sun Rise State of Andhra Pradesh

At the time of independence in 1947, Madras (now known as Chennai) was the capital city of the erstwhile Madras presidency of which the current Andhra Pradesh was a part. In 1953, on formation of the state of Andhra Pradesh, Kurnool city in the Rayalaseema region was designated as the new capital of AP. However, in 1956 after the reorganization of the states, Hyderabad state was merged with Andhra Pradesh and for the combined AP state Hyderabad was designated as the capital city.

Consequent to the bifurcation of Andhra Pradesh into AP and Telangana in 2014, Telangana retained Hyderabad as its capital whereas the newly formed state of AP was left high and dry. The newly formed state of AP has chosen to build its capital from the scratch at Amaravathi (near Vijayawada) on priority basis, though the AP Reorganisation Act provides for Hyderabad as the combined capital for a period of ten years to both AP and Telangana.

In view of unscientific bifurcation, AP state was left with no capital city, other infrastructure (particularly educational and other institutions) and major industries, as all these were built in Hyderabad city during the pre-bifurcation era of the state. Consequent to the above developments, the newly formed AP state posted a revenue deficit of Rs. 16,078.76 crores in the year 2014-15 i.e. first year of the state’s bifurcation.  

Revenue deficit of AP

As per the 14th Finance Commission estimates,  a total of Rs. 22,113 crores is to be paid to Andhra Pradesh as revenue deficit grant for the 5 year period (2015-16 to 2019-20).  The revenue deficit of AP in 2014-15 was Rs. 16,078.76 crores. The Centre gave a grant of Rs 2,303 crore and released Rs 3,979.50 crore. The Government of Bharat says the state’s total entitlement is only Rs 4,117.89 crore.

The state government presented revised figures of revenue deficit after omitting Rs 7,070 crore towards farmers’ debt redemption scheme. Though the revised actual revenue deficit stood at Rs 7,509 crore, the centre has not  released even the balance amount (Rs 3,520.50 crore) and says the state will get only Rs 138.39 crore more. AP Government has requested the centre to constitute an independent committee to determine the exact amount of the revenue deficit of the state for the year 2014-15 but the centre has not responded to this till date.

Under the FRMB (Fiscal Responsibility and Budget Management) Act, a state can borrow up to 3% of its GSDP (Gross Domestic State Product). Centre can give approval to the states to enhance their borrowings up to 3.5% of the state’s GSDP, provided the following criteria is met-

The debt to GSDP ratio should not exceed 25%, a State should have revenue surplus and its interest payments should not exceed 10% of its total revenue receipts.

As the AP state has not met the above parameters, the centre has declined the request of the state to increase its borrowing limits. Incidentally, AP state in its annual budget for the year 2018-19 presented in the assembly on 9th March, 2018 has estimated a revenue surplus of Rs. 5,235 Crores. It is ironical that the central government has revised its own fiscal deficit target to 3.5% from 3% for the year 2018-19 in its recent budget, whereas it has declined the request of AP State even though the state is currently passing through financial difficulties due to the faulty bifurcation of the state by the then central government headed by UPA.

However, AP state has managed to bring down the revenue deficit over the years as shown below, though the fiscal deficit has been increasing rapidly due to its increased borrowings to fund the capital growth.

Revenue Deficit/

Fiscal Deficit of AP

2014-15 2015-16 2016-17 2017-18

2018-19

(budgeted figures)

Revenue Deficit 14,242 7,302 4,597 4,018 5,235 ( surplus)
Fiscal Deficit 20,320 21,863 19,163 27,603 24,205

(Source: http://www.apfinance.gov.in)

Special Category State and Issues

The central government has gone on record saying 14th Finance Commission has recommended not to award special category state status to the states. However, the fact is that finance commissions have nothing to say on special category states. In this context one must go to the origin of the special category state in Bharat.

The concept of a special category state was first introduced in 1969 when the 5th Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks. The National Development Council accorded the special category status to states if they met certain conditions:

  • Hilly and difficult terrain
  • Low population density or sizable tribal population
  • Strategic location along borders with neighbouring countries
  • Economic and infrastructural backwardness
  • Non-viable nature of state finances

As is evident from the above, awarding special category status to a state is under the domain of The National Development Council. The scope for Finance Commission is only to recommend the sharing pattern of the tax revenues between the centre and the states. The objective of 14th Finance commission has been to fill the resource gaps of each state to the extent possible through tax devolution. 

The 14th Finance commission has provided post-devolution revenue deficit grants for states where devolution alone could not cover the assessed gap. Andhra Pradesh falls under this category eligible for revenue deficit grants since on the date of bifurcation i.e., 2nd June, 2014 the state had a revenue deficit. It may not be out of place to mention that the chairman of 14th Finance Commission Dr. Y.V. Reddy and member of the commission Mr. M. Govinda Rao, both have clarified on different occasions in different context that the 14th Finance Commission has not said anything about whether to grant or not the special category status to Andhra Pradesh as it was beyond the scope of the finance commission.

Capital city- Amaravathi

Section 92. (3) of the Act AP Reorganisation Act says the Central Government shall provide special financial support for the creation of essential facilities in the new capital of the successor State of Andhra Pradesh including the Raj Bhawan, High Court, Government Secretariat, Legislative Assembly, Legislative Council, and such other essential infrastructure.

The central government has so far released Rs. 2,500 crores for construction of the capital city at Amaravathi and will be releasing another Rs. 1,000 crores in the coming years. The state has formed an SPV, CRDA (Capital Region Development Authority) for the purpose of planning, co-ordination, execution, supervision, financing, funding and for promoting and securing the planned development of the capital region and capital city area for the state of Andhra Pradesh.

As mentioned earlier, the centre has declined the request of the state to raise its fiscal deficit ceiling of 3% in order to mobilize foreign debt to fund its infrastructural requirements, particularly for the building of capital city Amaravathi. 

Polavaram Irrigation Project

Prior to the state bifurcation, the Polavaram Project was being implemented by the Government of Andhra Pradesh with central assistance under the Accelerated Irrigation Benefits Programme (AIBP).  An expenditure of Rs 5,135.87 crore had been incurred up to 31.3.2014 including a central assistance of Rs 562.469 crore. The total project cost at 2010-11 price level is Rs. 16,010.45 crores. The cost of irrigation component of the Polavaram project is Rs.13,142 crores and the power and drinking water component is Rs. 2,868.45 crores.

The present central government has agreed to fund 100% of the remaining cost of the irrigation component of the Polavaram Project starting from 1.4.2014 (in the form of NABARD loan in turn to be repaid by the central government) which works out to Rs.  8,006.13 crore (Rs. 13,142 crore – Rs. 5,135.87 crore).

Polavaram Project was made a “national project” by AP Reorganisation Act 2014. Consequent to the bifurcation of the undivided AP into Telangana and AP in 2014, the Central Government had reviewed the earlier clearances viz., site clearance, environmental clearances, and relief and rehabilitation clearances among others, paving the way for smooth execution of this project.  Since 2014, the centre has given Rs. 2,190 crores (that includes Rs.1,890 crores NABARD loan, the repayment of which will be borne by the centre).

Overall, 53% works are completed in this project. 91% of the right main canal works and 60% of the left main canal works are completed. Head works are 39% completed. (http://polavaram.apegov.com/ispp/home#).   

Nearly 2 lakh people (51,047 families) in 216 villages in AP are expected to be displaced submerging nearly 1.6 lakh acres of lands. AP government has managed to resolve this issue out of court and paid farmers Rs. 700 crores as compensation.  

Meanwhile, in August 2017, the state government has submitted the revised cost estimate of Rs. 58,319.06  crores (at 2013-14 price level)  for the Polavaram Project to the centre which has a major share of Rs. 38,000 crores towards rehabilitation and resettlement. 60,258 acres of land is yet to be acquired and the compensation for land acquisition has increased consequent to the Land Acquisition Act, 2013 passed by the centre. The revised cost of the project excluding rehabilitation and resettlement works out to Rs. 20,319.06 crores resulting in cost escalation of Rs. 4,308.61 crores.

In the view of the recommendations of the Vice Chairman of NITI Aayog that it will be appropriate for the State of Andhra Pradesh to execute this project (as it is an important project and the State Government is keen to complete it at the earliest), the Government of Bharat has agreed to the State’s request for the execution of the project by the State Government on behalf of the Government of Bharat. The state government is eager to complete this project by 2019 and has taken up the additional responsibility of execution of the project in view of its apprehension based on the historical evidence that national projects executed under the direct supervision of the centre have always resulted in inordinate time and cost over runs. In its recent budget document for the year 2018-19 presented in the assembly, AP government has earmarked Rs. 13,000 crores for this project (which would in turn be claimed as reimbursement from the centre) in order to speed up the pending works.

Tax rebates for seven districts notified as backward areas

In September 2016, the Central Government announced tax rebates for seven districts of Andhra Pradesh (notified as backward areas) — Anantapur, Chittoor, Cuddapah,  Kurnool, Srikakulam, Vishakhapatnam and Vizianagaram, under the Andhra Pradesh Re-organisation Act, 2014. This tax rebate covers 15 per cent of higher additional depreciation and 15 per cent of investment allowance on the cost of plant and machinery acquired by any manufacturing undertaking setup during the period 1st April 2015 to 31st March 2020 in these seven districts. There is a need to extend this period to 10 years in view of the fact that the newly formed Andhra Pradesh state does not have any existing industrial corridor or a state capital at the time of state bifurcation.

Other Major Projects

Under the Thirteenth Schedule, Section 93 of the AP Reorganisation Act, 2014, the following two major projects and a railway zone are to be provided to the AP by the centre and so far there is no significant movement in this regard.

  1. A new major port at Duggirajupatnam in the successor State of Andhra Pradesh to be completed in phases with Phase I by end of 2018;
  2. SAIL, within six months from the appointed day, to examine the feasibility of establishing an integrated Steel Plant in YSR District of the successor State of Andhra Pradesh;
  3. Indian Railways, within six months from the appointed day, to examine establishing a new railway zone in the successor State of Andhra Pradesh and take an expeditious decision thereon;  

Apportionment of Assets and Liabilities

According to section 47(4) of the AP Reorganisation Act, any dispute regarding the amount of financial assets and liabilities shall be settled through mutual agreement, failing which by order by the Central Government on the advice of the Comptroller and Auditor-General of India.  

There are several issues like distribution or sharing of the common assets as mentioned in the schedules 9 (government companies and corporations) and 10 (training institutions/centres) of the Act wherein the centre has the powers under section 66 of the Act and is expected to assist both the sates (AP and Telangana) in allocation of such assets or adjustment of liabilities between both the states.

Unfortunately, centre has not taken any serious steps on the above and it has even led to an unpleasant development of AP Power Generation Corporation moving the National Company Law Tribunal to recover its arrears amounting to more than Rs. 3,700 crores from Telangana Power Distribution Company by initiating insolvency petition under section 9 of Insolvency and Bankruptcy Code.

This is perhaps the first instance of one state entity initiating insolvency proceedings against another state entity, an avoidable development. The Governor, who is common for both the states, along with the centre should have taken the initiative to resolve this issue through negotiations but failed to do so.

Need for statutory backing to the special development package announced by the centre to AP

As three and half years have passed by, but not much movement has taken place with regard to several pending issues in the AP Reorganisation Act and the special package announced by the centre, the MPs represented by the ruling TDP party in Andhra Pradesh have raised a private member bill in the parliament on 29th December, 2017 seeking an amendment to the AP Reorganisation Act, 2014, to obtain statutory backing to the special development package announced by the central government to the state of Andhra Pradesh on 7th September, 2016 so as to legitimize the assurances made by the centre.

By doing the state bifurcation in the most unscientific way, the then UPA led by Congress has incurred the wrath of the people of AP and was completely decimated in the 2014 general elections. Post bifurcation of the state in 2014, the central government NDA led by BJP and the ruling party in AP state TDP, as well as the main opposition party YSRC, now have major stakes and the roles they play and more importantly how the people of AP perceive the same will decide the outcome and the fate of these political parties in the ensuing 2019 state & general elections.

It is to be noted that:-

  • AP is the first state in the country which has enacted the industrial single window clearance.
  • AP government has also won 26 awards in power sector during 2015 to 2017.
  • AP has occupied the 1st position in Ease of Doing Business Rankings given by the World Bank and the Department of Industrial Policy and Promotion, Government of Bharat for the years 2016-17 and 2017-18 continuously
  • The state has recorded an impressive agricultural growth of 14.03% in 2016-17, which is one of the highest growth rates in Bharat.

Let us hope the sun rise state of Andhra Pradesh will shine through the passing clouds and the above facts will bear testimony for the same.


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About the Author

B.N.V. Parthasarathi
Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. E mail- [email protected]